|
|
 | | | |
- close
- close
- close
- close
| |||||||||
Cascade Bancorp 10-Q 2010 Documents found in this filing:SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(MARK
ONE)
For the
quarterly period ended: September 30,
2010
For the
transition period from ________ to __
Commission
file number: 0-23322
CASCADE
BANCORP
(Exact
name of Registrant as specified in its charter)
1100 N.W.
Wall Street
Bend,
Oregon 97701
(Address
of principal executive offices)
(Zip
Code)
(541)
385-6205
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes x No
¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files).
Yes o No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act:
¨ Large
Accelerated Filer ¨
Accelerated Filer ¨
Non-accelerated Filer x
Smaller Reporting Company
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes ¨ No x
Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date. 28,538,399 shares of no par value
Common Stock as of November 1, 2010. CASCADE
BANCORP & SUBSIDIARY
FORM
10-Q
QUARTERLY
REPORT
SEPTEMBER
30, 2010
INDEX
2
PART I
ITEM
1. FINANCIAL STATEMENTS
Cascade
Bancorp & Subsidiary
Condensed
Consolidated Balance Sheets
September
30, 2010 and December 31, 2009
(Dollars
in thousands)
(unaudited)
See
accompanying notes. 3
Cascade
Bancorp & Subsidiary
Condensed
Consolidated Statements of Operations
Nine
Months and Three Months ended September 30, 2010 and 2009
(Dollars
in thousands, except per share amounts)
(unaudited)
See
accompanying notes. 4
Cascade
Bancorp & Subsidiary
Condensed
Consolidated Statements of Changes in Stockholders’ Equity
Nine
Months Ended September 30, 2010 and 2009
(Dollars
in thousands)
(unaudited)
See
accompanying notes. 5
Cascade
Bancorp & Subsidiary
Condensed
Consolidated Statements of Cash Flows
Nine
Months ended September 30, 2010 and 2009
(Dollars
in thousands)
(unaudited)
See
accompanying notes. 6
Cascade
Bancorp & Subsidiary
Notes
to Condensed Consolidated Financial Statements
September
30, 2010
(unaudited)
The
accompanying interim condensed consolidated financial statements include the
accounts of Cascade Bancorp (“Bancorp”), a one bank holding company, and its
wholly-owned subsidiary, Bank of the Cascades (the “Bank”) (collectively, “the
Company” or “Cascade”). All significant inter-company accounts and transactions
have been eliminated in consolidation.
The
interim condensed consolidated financial statements have been prepared by the
Company without audit and in conformity with accounting principles generally
accepted in the United States (GAAP) for interim financial information.
Accordingly, certain financial information and footnotes have been omitted or
condensed. In the opinion of management, the condensed consolidated
financial statements include all necessary adjustments (which are of a normal
and recurring nature) for the fair presentation of the results of the interim
periods presented. In preparing the condensed consolidated financial
statements, management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities as of the date of the balance
sheets and income and expenses for the periods. Actual results could
differ from those estimates. Operating results for the interim periods disclosed
herein are not necessarily indicative of the results that may be expected for a
full year or any future period.
The
condensed consolidated financial statements as of and for the year ended
December 31, 2009 were derived from audited consolidated financial
statements, but do not include all disclosures contained in the Company’s Annual
Report on Form 10-K/A for the year ended December 31, 2009. The
interim condensed consolidated financial statements should be read in
conjunction with the December 31, 2009 consolidated financial statements,
including the notes thereto, included in the Company’s Annual Report on Form
10-K/A for the year ended December 31, 2009.
Certain
amounts for 2009 have been reclassified to conform with the 2010
presentation.
Investment
securities at September 30, 2010 and December 31, 2009 consisted of the
following (dollars in thousands):
7
The
following table presents the fair value and gross unrealized losses of the
Bank’s investment securities, aggregated by investment category and length of
time that individual securities have been in a continuous unrealized loss
position, at September 30, 2010 and December 31, 2009 (dollars in
thousands):
The unrealized losses on investments in
U.S. Agency and non-agency MBS and U.S Agency asset-backed securities are
primarily due to elevated yield/rate spreads at September 30, 2010 and December
31, 2009 as compared to yield/spread relationships prevailing at the time
specific investment securities were purchased. Management expects the
fair value of these investment securities to recover as market volatility
lessens, and/or as securities approach their maturity
dates. Accordingly, management does not believe that the above gross
unrealized losses on investment securities are
other-than-temporary. Accordingly, no impairment adjustments have
been recorded.
Management
intends to hold the investment securities classified as held-to-maturity until
they mature, at which time the Company will receive full amortized cost value
for such investment securities. Furthermore, as of September 30,
2010, management did not have the intent to sell any of the securities
classified as available-for-sale in the table above and believes that it is more
likely than not that the Company will not have to sell any such securities
before a recovery of cost.
As of September 30, 2010, the
carrying value of the Bank’s investment in FHLB stock was $10.5 million and is a
condition of membership in the FHLB system and, as such, is required to
obtain credit and other services from the FHLB. As of June 30, 2010, the FHLB
met all of its regulatory capital requirements, but remained classified as
“undercapitalized” by its primary regulator, the Federal Housing Finance Agency
(FHFA), due to several factors including the possibility that further declines
in the value of its private-label mortgage-backed securities could cause it to
fall below its risk-based capital requirements. On October 26, 2010,
the FHLB announced that FHLB entered into a Consent Agreement with
the FHFA, which requires the FHLB to take certain specified actions related to
its business and operations. The FHFA continues to deem the FHLB
"undercapitalized" under the FHFA's Prompt Corrective Action
rule. Management considers several factors in evaluating impairment
including the commitment of the issuer to perform its obligations and to provide
services to the Bank. Based upon the foregoing, management has not
recorded an impairment of the carrying value of our FHLB stock as of
September 30, 2010.
The
composition of the loan portfolio at September 30, 2010 and December 31, 2009
was as follows (dollars in thousands): 8
Total
loans continue to be strategically reduced as a result of paydowns, select loan
sales or participations, non-renewal of mainly transaction-only loans where the
deposit relationship with the related customer was de minimus, as well as net
charge-offs (particularly in the residential land development
portfolio).
The above
loans are net of deferred loan fees of approximately $2.7 million at September
30, 2010 and $3.3 million at December 31, 2009.
Transactions in the reserve for loan
losses and unfunded commitments for the nine months ended September 30, 2010 and
2009 were as follows (dollars in thousands):
At
September 30, 2010, the Bank had approximately $207.6 million in outstanding
commitments to extend credit, compared to approximately $288.7 million at
year-end 2009. The reduction is a function of completion of prior period
construction draws as well as management’s efforts to reduce commitments to a
lower level. Reserves for unfunded commitments are classified as
other liabilities in the accompanying condensed consolidated balance
sheets.
Risk of nonpayment exists with respect
to all loans, which could result in the classification of such loans as
non-performing. NPA balances have declined during 2010 compared to the rapid
growth experienced in the first half of 2009. While this is a
positive development no assurance can be given that NPA’s will not increase in
the future. During the three months ended September 30, 2010 certain non
performing loans were foreclosed upon resulting in a reduction in non performing
loans (NPL’s). 9
At September 30, 2010, the Company had
22 troubled debt restructurings ("TDRs") totaling $41.4 million, of which $11.5
million is reported as non-accrual loans. At December 31, 2009, the
Company’s TDR’s totaled $27.3 million, of which $11.8 million was reported as
non-accrual loans. The TDRs at September 30, 2010 and December 31, 2009
are classified as impaired loans and, in the opinion of management, are reserved
appropriately.
The
following table presents information with respect to NPA’s at September 30, 2010
and December 31, 2009 (dollars in thousands):
The
composition of NPA’s as of September 30, 2010, June 30, 2010, March 31, 2010 and
December 31, 2009 was as follows (dollars in thousands):
The
following table presents non-performing assets as of September 30, 2010, June
30, 2010, March 31, 2010 and December 31, 2009 by region (dollars in
thousands):
A loan is
considered to be impaired (non-performing) when it is determined probable that
the principal and/or interest amounts due will not be collected according
to the contractual terms of the loan agreement. Impaired loans are generally
carried at the lower of cost or fair value, which may be determined based upon
recent independent appraisals which are further reduced for estimated selling
costs or as a practical expedient basis by estimating the present value of
expected future cash flows, discounted at the loan’s effective interest
rate. Certain large groups of smaller balance homogeneous loans,
collectively measured for impairment, are excluded. Impaired loans are charged
to the reserve for loan losses when management believes after considering
economic and business conditions, collection efforts and collateral position
that the borrower’s financial condition is such that collection of principal is
not probable. See “Footnote 13 – Fair Value Measurements” for additional
information related to fair value measurement. 10
At
September 30, 2010, impaired loans carried at fair value totaled
approximately $111.3 million and related specific valuation allowances were
approximately $6.6 million. At December 31, 2009, impaired loans
were approximately $147.6 million and related specific valuation allowances were
approximately $0.1 million. Interest income recognized for cash
payments received on impaired loans for the periods presented was insignificant.
The average recorded investment in impaired loans was approximately $149.3
million and $159.3 million for the nine months ended September 30, 2010 and
2009, respectively.
The
accrual of interest on a loan is discontinued when, in management’s judgment,
the future collectability of principal or interest is in doubt. Loans
placed on non-accrual status may or may not be contractually past due at the
time of such determination, and may or may not be secured. When a
loan is placed on non-accrual status, it is the Bank’s policy to reverse, and
charge against current operations, interest previously accrued on the loan but
uncollected. Interest subsequently collected on such loans is credited to loan
principal if, in the opinion of management, full collectability of principal is
doubtful. Interest income that was reversed and charged against
income for the nine months ended September 30, 2010 and 2009, was approximately
$0.9 million and $1.6 million, respectively.
Since a
significant portion of the Bank’s loans are collateralized by real estate, the
Bank primarily measures impairment of such loans based on the estimated fair
value of the underlying real estate collateral. OREO is carried at the lower of
cost or estimated net realizable value, which is also based on the estimated
fair value of the related real estate property. The valuation of real estate
collateral and OREO is subjective in nature and may be adjusted in the future
because of changes in economic conditions. The valuation of real estate
collateral and OREO is also subject to review by Federal and State bank
regulatory authorities who may require increases or decreases to carrying
amounts based on their evaluation of the information available to them at the
time of their examinations of the Bank, in addition to State banking regulations
which require periodic mandatory write-downs of OREO. Management considers
third-party appraisals, as well as independent fair market value assessments
from realtors or persons involved in selling real estate and OREO, in
determining the estimated fair value of particular properties. In addition, as
certain of these third-party appraisals and independent fair market value
assessments are only updated on an annual basis, changes in the values of
specific properties may have occurred subsequent to the most recent appraisals.
Accordingly, the amounts of any such potential changes – and any related
adjustments – are generally
recorded at the time such information is received.
The following table presents activity
related to OREO for the periods shown (dollars in thousands):
Effective
April 30, 2010, the Bank executed an agreement to sell its mortgage servicing
assets as previously discussed in the Company’s Quarterly Report on Form 10-Q
for the period ending March 31, 2010. Going forward, the Bank will
not directly service mortgage loans it originates, but rather sell originations
“servicing released”. “Servicing released” means that whoever the Bank sells the
loan to will service or arrange for servicing of the loan.
MSRs are
included in other assets in the accompanying condensed consolidated balance
sheet as of December 31, 2009. MSR’s were carried at the lower of
origination value less accumulated amortization, or current fair
value. The net carrying value of MSRs was approximately $3.9 million
at December 31, 2009. 11
Activity
in MSRs for the nine months ended September 30, 2010 and 2009 was as follows
(dollars in thousands):
For further discussion of activity in
MSRs for the nine months ended September 30, 2010 and 2009, please see
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations - Non-Interest Income” elsewhere in this Form 10-Q.
At
September 30, 2010, the Company had four subsidiary grantor trusts for the
purpose of issuing Trust Preferred Securities (TPS) and common securities. The
common securities were purchased by the Company, and the Company’s investment in
the common securities of $2.1 million is included in accrued interest and other
assets in the accompanying condensed consolidated balance sheets. The
weighted average interest rate of all TPS was 2.82% at September 30, 2010 and
2.79% at December 31, 2009.
During
2009, the Company exercised its right to defer regularly scheduled interest
payments on outstanding junior subordinated debentures related to its TPS. At
September 30, 2010, the Company had a balance in other liabilities of $3.2
million in accrued and unpaid interest expense related to these junior
subordinated debentures, and it may not pay dividends on its common stock until
all accrued but unpaid interest has been paid in full. Payment of dividends is
also restricted by state and federal regulators (see Note 14). The Company has
recorded and continues to record junior subordinated debenture interest expense
in its statement of operations.
At September 30, 2010 the Bank had a
total of $195.0 million in long-term borrowings from FHLB with maturities
ranging from 2011 to 2017, bearing a weighted-average rate of 1.83% with $50
million maturing in 2011. In addition, the Bank had
$98.0 million in off-balance sheet FHLB letters of credit used for
collateralization of public deposits held by the Bank. The available
line of credit with the FHLB is reduced by the amount of these letters of
credit. Also, the Bank had $41.0 million of senior unsecured debt
issued in connection with the Federal Deposit Insurance Corporation’s (“FDIC”)
Temporary Liquidity Guarantee Program (“TLGP”) maturing February 12, 2012
bearing a weighted average rate of 2.04%, exclusive of net issuance costs and 1%
per annum FDIC insurance assessment applicable to TLGP debt which are being
amortized straight line over the term of the debt. (See Management’s Discussion
and Analysis of Financial Results of Operation - “Liquidity and Sources of
Funds” for further discussion).
The
Company’s basic loss per common share is computed by dividing net loss by the
weighted-average number of common shares outstanding during the
period. The Company’s diluted loss per common share is the same as
the basic loss per common share due to the anti-dilutive effect of common stock
equivalents.
The
numerators and denominators used in computing basic and diluted loss per common
share for the nine months and three months ended September 30, 2010 and 2009 can
be reconciled as follows (dollars in thousands, except per share
data): 12
During
the nine months ended September 30, 2010 the Company granted 770,750 stock
options with a calculated fair value of $0.43 per option. The Company did not
grant any equity grants for the nine month period ended September 30,
2009.
The
Company used the Black-Scholes option-pricing model with the following
weighted-average assumptions to value options granted for the nine months ended
September 30, 2010:
The dividend yield is based on
historical dividend information. The expected volatility is based on historical
volatility of the Company’s common stock price. The risk-free interest rate is
based on the U.S. Treasury yield curve in effect at the date of grant for
periods corresponding with the expected lives of the options granted. The
expected option lives represent the period of time that options are expected to
be outstanding giving consideration to vesting schedules and historical exercise
and forfeiture patterns.
The
Black-Scholes option-pricing model was developed for use in estimating the fair
value of publicly-traded options that have no vesting restrictions and are fully
transferable. Additionally, the model requires the input of highly
subjective assumptions. Because the Company’s stock options have
characteristics significantly different from those of publicly-traded options,
and because changes in the subjective input assumptions can materially affect
the fair value estimates, in the opinion of the Company’s management, the
Black-Scholes option-pricing model does not necessarily provide a reliable
single measure of the fair value of the Company’s stock options.
The
following table presents the activity related to stock options for the nine
months ended September 30, 2010:
As of
September 30, 2010, there was approximately $0.4 million of unrecognized
compensation expense related to nonvested stock options, which will be
recognized over the remaining vesting periods of the underlying stock
options. 13
During the nine months ended September
30, 2010, the Company granted 378,000 shares of nonvested restricted stock at a
weighted-average grant date fair value of $0.57 per share
(approximately $215,000). The nonvested restricted stock is scheduled to
cliff-vest three years from the grant date.
The following table presents the
activity for nonvested restricted stock for the nine months ended September 30,
2010:
As of September 30, 2010, unrecognized
compensation cost related to nonvested stock totaled approximately $0.4
million. The nonvested stock is scheduled to vest over periods of
three to four years from the grant date. The unearned compensation on
nonvested stock is being amortized to expense on a straight-line basis over the
applicable vesting periods.
The
Company has also granted awards of restricted stock units (RSUs). A RSU
represents the unfunded, unsecured right to require the Company to deliver to
the participant one share of common stock for each RSU. There was no
unrecognized compensation cost related to RSUs at September 30, 2010 and 2009,
as all RSUs were fully-vested.
During
the three months ended September 30, 2010 the IRS commenced a required
examination of the Company’s 2009 tax year and December 31, 2009 income tax
receivable of $43.3 million. In connection therewith, and in completion of
the 2009 income tax examination, the Company settled with the IRS’ field
examiner and recorded a provision for income taxes of $1.1 million for the three
months ended September 30, 2010. The provision for income taxes of $0.5 million
for the nine months ended September 30, 2010 also reflects adjustments to the
2009 income tax receivable. During the three month and nine month periods
ended September 30, 2009, the Company recorded income tax benefits of $9.7
million and $31.4 million, respectively, as management believed at that time
that it was more likely than not that such benefits would be received.
Effective December 31, 2009, management determined that there should be a 100%
valuation allowance against the Company’s net deferred tax assets.
As of
September 30, 2010, the Company maintained a valuation allowance of $37.4
million against the deferred tax asset balance of $36.3 million, for a net
deferred tax credit of $1.1 million. This amount represented a $0.1 million
increase from year-end 2009 due to an increase in gross unrealized gains in the
Company’s investment portfolio during the nine months ended September 30, 2010.
The Company’s future net deferred tax asset or liability will continue to be
impacted by changes in the gross unrealized gains/losses on the Company’s
investment portfolio. For discussion of the Company’s deferred income tax assets
see “Critical Accounting Policies – Deferred Income Taxes” included in the
Company’s Annual Report on Form 10-K/A for the year ended December 31,
2009.
GAAP
establishes a hierarchy for determining fair value measurements, and
includes three levels based upon the valuation techniques used to measure assets
and liabilities. The three levels are as follow:
14
A
description of the valuation methodologies used for instruments measured at fair
value, as well as the general classification of such instruments pursuant to the
valuation hierarchy, is set forth below. These valuation methodologies were
applied to all of the Company’s financial assets and financial liabilities
carried at fair value. In general, fair value is based upon quoted
market prices, where available. If such quoted market prices are not available,
fair value is based upon internally-developed models that primarily use, as
inputs, observable market-based parameters. Valuation adjustments may be made to
ensure that financial instruments are recorded at fair value. These adjustments
may include amounts to reflect counterparty credit quality and the Company’s
creditworthiness, among other things, as well as unobservable parameters. Any
such valuation adjustments are applied consistently over time. The Company’s
valuation methodologies may produce a fair value calculation that may not be
indicative of net realizable value or reflective of future fair values. While
management believes that the Company’s valuation methodologies are appropriate
and consistent with other market participants, the use of different
methodologies or assumptions to determine the fair value of certain financial
instruments could result in a different estimate of fair value at the reporting
date. Furthermore, the reported fair value amounts have not been comprehensively
revalued since the presentation dates, and therefore, estimates of fair value
after the condensed consolidated balance sheet date may differ significantly
from the amounts presented herein.
The
following is a description of the valuation methodologies used for instruments
measured at fair value, as well as the general classification of such
instruments pursuant to valuation hierarchy:
Investment
securities: Where quoted prices for identical assets are available in an
active market, investment securities available-for-sale are classified within
level 1 of the hierarchy. If quoted market prices for identical securities are
not available then fair values are estimated by independent sources using
pricing models and/or quoted prices of investment securities with similar
characteristics or discounted cash flows. The Company has categorized its
investment securities available-for-sale as level 2, since a majority of such
securities are MBS which are mainly priced in this latter manner.
Impaired loans: A
loan is considered to be impaired when, based on current information and events,
it is probable that the Company will be unable to collect all amounts due (both
interest and principal) according to the contractual terms of the loan
agreement. Impaired loans are measured based on the present value of expected
future cash flows discounted at the loan’s effective interest rate or, as a
practical expedient, at the loan’s observable market price or the fair market
value of the collateral. A significant portion of the Bank's impaired loans are
measured using the estimated fair market value of the collateral.
OREO: Management
obtains third party appraisals as well as independent fair market value
assessments from realtors or persons involved in selling OREO in determining the
estimated fair value of particular properties. Accordingly, the valuation of
OREO is subject to significant external and internal judgment. Management
periodically reviews OREO to determine whether the property continues to be
carried at the lower of its recorded book value or estimated fair
value.
At
September 30, 2010 and December 31, 2009, the Company had no financial
liabilities measured at fair value on a recurring basis. The
Company’s financial assets measured at fair value on a recurring basis at
September 30, 2010 and December 31, 2009 are as follows (dollars in
thousands): 15
Certain
non-financial assets are also measured at fair value on a non-recurring
basis. These assets primarily consist of intangible assets and other
non-financial long-lived assets which are measured at fair value for periodic
impairment assessments.
Certain
assets are measured at fair value on a nonrecurring basis (e.g., the instruments
are not measured at fair value on an ongoing basis but are subject to fair value
adjustments when there is evidence of impairment). The following table
represents the assets measured at fair value on a nonrecurring basis by the
Company at September 30, 2010 and December 31, 2009 (dollars in
thousands):
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||